Autumn Budget 2018: an end to austerity?

Yesterday, Chancellor Philip Hammond announced his Autumn 2018 Budget. Melanie Powell, Senior Lecture in Economics at the University of Derby, gives her verdict on the Chancellor’s announcements.

The Chancellor was quick to get his big political messages out in the first few minutes of his budget:

He will do whatever it takes, including making the next spring statement a full-blown budget, if Brexit negotiations fail, while adding an extra £500m now to the ‘no deal’ preparation fund.

The economy data is positive and better than forecast. Growth forecasts for 2019 are up a little, the deficit is forecast to fall further, pay growth is up and the Chancellor believes he will meet his fiscal rules early.

He wasn’t prepared to say ‘the end of Austerity’, instead he pronounced ‘Austerity is coming to an end’.

The big spending

The big spending, already announced, is directed at the NHS, with an extra £20.5bn in real terms over five years, with additional £2bn spending on mental health services. The Chancellor confirmed a £30bn package for roads and a 30% increase in infrastructure spending over four years, with £1.6bn new investment to support the Government’s industrial strategy. Investment is a key support mechanism for a post-Brexit UK as business investment has fallen.

He made a political move by announcing there would be no further Private Finance Initiatives signed. There were a number of extra supports for business including raising the annual investment allowance and halving the apprentice levy for SMEs, alongside the already announced business rate relief, cutting the business rate by one third for those with a rateable value of £51,000 or less and providing £650m to enhance our high streets.

Political point scoring and scattergun spending

The Chancellor tried to score political points by scattering small-scale spending, targeted at issues in the news. He announced an extra £700m for social care, some additional money for grant funding of local councils, and some extra funding for counter terrorism policing and armed forces veterans.

He tried to make some political ground by announcing £1bn additional funding to the Ministry of Defence for enhancing cyber and deterrent security and £1.7m for education around the Holocaust. Other smaller giveaways included money for the air ambulance service, £400m for the schools capital programme, £420m for local councils to repair the ever-growing number of potholes and £10m to help clear up abandoned waste sites.

He made more political ground by announcing a more than inflation rise in the national living wage, rising from £7.38 to £8.21/hour in April, but was clearly fending off criticism of the government’s Universal Credit rollout by offering a further £1bn over five years for claimants on Universal Credit, and an increase of £1.7bn in work allowances for Universal Credit.

Housing markets

The Chancellor targeted younger earners, by removing stamp duty on all first-time buyers purchasing shared equity homes of up to £500,000. There was a small boost to the housing market, with an extra £500m for the Housing Infrastructure Fund to build an extra 650,000 homes, a new agreement with housing associations for 13,000 homes and £1bn of guarantees for smaller house-builders.

Tax changes

The fiscal loosening also included raising pre-announced tax thresholds earlier. At a cost of £2.8bn, he gave lower-rate taxpayers a boost of £130 a year and higher-rate taxpayers an £860 boost, by raising the personal tax allowances in April, one year earlier than planned.

As announced, the Chancellor did not raise extra tax from fuel duty because oil prices are rising, or change alcohol duties, raising only wine duty in line with inflation and tobacco and cigarettes in line with inflation plus 2%.

However, he went further than anticipated by announcing a 2% digital service tax on the UK revenues of big technology companies from April 2020. There were no details and this tax may never come to fruition, depending on the Brexit deal, future trade deals and reaction from the US.

There was a small nod to the Green agenda by announcing a new tax on imported plastic packaging where less than 30% is recyclable and to the gambling problem by raising the Remote Gaming Duty rate to 21% for online games of chance from 2019.

An end to austerity?

That depends on your definition and your experience of austerity. There are still billions of pounds of cuts in the pipeline, with only the NHS seeing substantial real increases. There is, however, a real change of direction towards fiscal loosening in this Budget. It allows public spending to rise at 1.2% a year for the next five years, without raising main tax rates or freezing tax thresholds.

The Chancellor can afford this fiscal loosening in the Budget without raising tax because borrowing was £11.6bn less than expected this year, and by accepting more borrowing in the next few years. The plan depends on post-Brexit growth increasing.

Ending austerity would mean reversing the cuts already implemented, funded by borrowing and higher taxes, and that is not part of this Budget plan.